Chapter 11 reading guide

Question 1

What is audit sampling? What is the auditor’s objective when using sampling

Answer 1

the application of an audit procedure to less than 100% of the items within an account balance or class of transactions,

objective is so they can obtain sufficient appropriate audit evidence so they can make a conclusion about whether the population as a whole is fairly stated

Question 2

What is sampling risk? What is the erroneous conclusion that could be reached if testing controls? What is
the erroneous conclusion that could be reached if performing tests of details of account balances?

Answer 2

sampling risk: risk that the auditor’s conclusion based on a sample will be different from the conclusion they would have reached if the entire population were tested

erroneous conclusion if testing controls would be that the control is operating effectively when it actually isnt

erroneous conclusion that could be reached if performing tests of details of account balances is claiming they are fairly stated when it actually contains a material misstatement

Question 3

What is non-sampling risk? Can you provide an example of non-sampling risk when performing a test of
control? Can you provide an example of non- sampling risk if performing a test of detail of account balance?

Answer 3

nonsampling risk: risk that the auditor reaches an incorrect conclusion for reasons unrelated to the sample itself

example: auditor tests whetere purchase orders are approved my management, but several POs are signed electronically, auditor assumed only handwritten signatures count when in reality the electronic signatures were also okay

example: auditor testing accounts receivable gets replied from customers confirming amounts, however the auditor fails to recognize that the confirmations were sent to outdated addresses, meaning the confirmations were not valid evidence

Question 4

What is statistical sampling? Can you provide an example?

Answer 4

sampling approach that uses the laws of probability to both select sample items and evaluate the results of the sample

auditor can quantify sampling risk since its based on probability theory

example: auditor takes 200 sales invoices out of 10,000, randomly selected, after testing he finds 3 errors totally 1,500, they can take that number and compute the confidence interval, etc

Question 5

What is non-statistical sampling? Can you provide an example?

Answer 5

method where the auditor uses professional judgement rather than formal probability techniques to

1 select the sample
2 evaluate the results

example: auditor checking cash disbursments, checks the 25 largest dollar amounts or mainly those near year-end

Question 6

What is tolerable misstatement?

Answer 6

maximum amount of mistatement the auditor is willing to accept in an account balance or class of transactions without concluding that the financial statements are materially misstated

Question 7

What is stratification? Can you provide an example of when you would might stratify an account balance?

Answer 7

process of dividing a population into two or more subpopulations that are tested independently

for example testing for accounts receivable customers, you can seperate them into groups, those who owe <50k those who owe between 50-100k, etc

Question 8

What are the seven types of sample selection methods? Describe each one

Answer 8

3 probabilistic
- random selection
- systematic sample selection
- probability - proportional to the size sample selection

3 nonprobabilistic
- directed sample selections
- block sample selection
- haphazard sample selection

both nonprobabilistic and probabilistic
- stratified (layers of data) sample selection

Question 9

When is it acceptable to use ADAs? What is a key difference between using ADAs and traditional sampling?

Answer 9

• when there is data that is relevant for the assertion or attribute that is being tested (ada is most suited for testing accuracy and cut-off assertions
• the data is relaible
• data is accesible and has been scrubbed of errors so it is in a usable format

Question 10

sample size equation

Answer 10

sample size = (population recorded amount * confidence factor) / tolerable misstatement

Question 11

estimated misstatement equiation

Answer 11

= (errors in sample/sample book value) * population book value